HANOI (Bloomberg): The clock is ticking on Vietnam’s pursuit of inclusion in emerging market indexes, with its demand for upfront funding by equity investors a key stumbling block.
JPMorgan Chase & Co. and HSBC Holdings Plc are among the banks expecting Vietnam’s $269 billion stock market to win an upgrade from FTSE Russell later this year, with the nation targeting inclusion by 2025. The securities regulator is pushing hard to fulfill the criteria, according to Chairwoman Vu Thi Chan Phuong.
On paper, Vietnam is a prime candidate to join the ranks of emerging markets: the economy is among the fastest-growing in Southeast Asia, it’s recognized as a global manufacturing hub and the stock market has recorded double-digit gains in three of the past five years. Foreign investors though are balking at the need to have fully-funded accounts in the country before they can start trading.
"For the FTSE Russell upgrade, Vietnam basically needs to remove” the requirement for funds to only invest with cash already in the country, said Ruchir Desai, a fund manager at Asia Frontier Capital Ltd. "That is the key. Given its ability to generate 6%+ GDP growth in the next 3-5 years along with stable macro-economic and political indicators, Vietnam does have an edge over some other economies in the region.”
The next FTSE review is on March 27, though the index compiler typically announces changes in September. It declined to comment to Bloomberg News on potential outcomes. Vietnam has been placed on a watchlist for an upgrade from frontier market since 2018.
Should the nation get an upgrade, it’ll join Indonesia, Thailand, Malaysia and the Philippines from Southeast Asia in the FTSE Advanced Emerging and Secondary Emerging universe. Its stock market is already bigger than the Philippines.
"Progress has been slower than anticipated,” FTSE said last September. Vietnam’s practice of a check to ensure the availability of funds before an order can be made means it hasn’t met a settlement criterion. Processes for opening new accounts are also concerns, it added.
Vietnam is piloting a trading system to resolve the deposit issue and shorten the settlement cycle, but it’s yet to officially launch.
Another stumbling block is a cap on foreign holdings. For instance, the combined stake of global investors in listed banks is limited to 30%, while they can’t exceed 49% in some large-cap firms.
"For a lot of clients, opening an account is a crazy process in Vietnam,” said Vicki Chi, a portfolio manager at Robeco in Hong Kong. "Once you start trading, the market is inefficient and liquidity is also very low. The government has quite some work to do to streamline this process to make it a more friendly place for international capital.”
The country needs to introduce an efficient mechanism to facilitate trading between foreign investors in securities that have reached, or are approaching, those limits, FTSE has said. This is an even bigger issue for rival MSCI Inc.
Vietnam has said it aims to raise the capitalization of its stock market to 100% and 120% of gross domestic product by 2025 and 2030, respectively. JPMorgan predicted that an upgrade would drive $500 million of passive inflows.
There are signs local investors are positioning for a change, with the benchmark VN-Index rallying 10% this year, according to Devendra Joshi, head of microstrategy at CLSA Ltd. Global funds though have been selling, with a net outflow of $23 million.
Still, an upgrade may not be all it’s cracked up to be. The example of Pakistan, which got downgraded by MSCI just four years after it was raised to an emerging market status, underscores the danger of a reversal of capital flows.
So the message may be dual: The emerging-market elevation faces key challenges, and even if it does happen, caution about future stock performance is warranted.
"Investors tend to anticipate market upgrades ahead of the actual announcement,” HSBC Holdings Plc analysts including Shuo Han Tan wrote in a note. "As Vietnam achieves various milestones toward the targeted date of July 2025, its stock market could increasingly price this in throughout 2024.”
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